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These REITs Are at Risk

Recently, an underconsidered threat to the mortgage REIT industry surfaced -- specifically, regulation that could threaten mortgage REIT returns by either restricting the massive amounts of debt used to boost returns or eliminating their tax-exempt status.

As I've written, there are too few details to tell how credible or far-reaching potential regulation is, but we can at least see the mortgage REITs most at risk from a leverage standpoint. We should also look at whether these REITs mainly buy agency securities or non-agency securities. The former are guaranteed by government-ish entities like Fannie Mae and Freddie Mac and may get different (read: more favorable) regulatory treatment.

Here are the sizeable mortgage REITs (those with more than $200 million in market capitalization) with the highest leverage. I've also included their dividend yields and mentioned whether they're focused on agency securities.

Except for Newcastle, this table isn't that surprising. Mortgage REITs that focus on agency securities can leverage up more than their non-agency-focused counterparts can because the default risk on their investments is basically that of the federal government. The leverage adds to their profitability, with the direct result that at least 90% of that profitability is paid out as dividends -- huge ones.

Still, the leverage employed is risky not just because of possible regulation, but also because, like the Wall Street banks, these REITs are beholden to short-term credit markets. If they lose their ability to re-up their borrowings, trouble ensues. And that's not even considering interest-rate risk.

For the flip side, I'll be back soon with the mortgage REITs that have the lowest leverage.

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Once again a hack job by another Fool. I have used another post from the AGNC message board, but I know the poster won't mind. He worked in the regulatory arena and his post was pretty clear on what the SEC is doing. The SEC is issuing a concept release. Here are the responses to date.

The SEC concept release is not even an ANPR (advanced notice of proposed rulemaking). An agency issues and ANPR to get public comment before it drafts an NPR (Notice of proposed rulemaking)that outlines the proposal and requests public comment. An agency can go straight to the NPR, without an ANPR or concept relase. However, if the agency is unsure of public reaction, or how it should proceed, it may first issue an ANPR. Following the ANPR, and after many changes to the proposed rule, based on public comment, the agency decides if it will change the proposed rule, or possibly not issue it at all.

It can also change the rule to exclude or grandfather some entities. At each stage the agency must include an detailed financiial impact analysis of the cost of the proposed rule. (Thanks to Ronnie Regan). Then comes the final rule, which outlines the ruling and must also include another financial impact analysis.

At this stage, the SEC has issued a trial baloon that is not even a proposal.

According to the same poster, he said it takes about two or three years before it is even close to something that would be enacted.

So, once again, you are pretty far away from the truth and just posted some garbage that the MREIT's have sorted through already. The article is behind in addition to being inaccurate.

Please get a new record to play, this one is getting worn out.. I have been hearing this same siren song for nearly 3 years from the Fool...and yet rates stay low and Uncle Ben has already announced he will everything in his power to keep them that way for 2 more years...and the dividends keep marching on.

Agree with Kafue, the headline is shouting a message; the cover yourself line is hardly a balanced approach. The head line should have been "recent headlines about regulation of mREITs greatly overblown."